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Equity

  • Where a project, proposal or option has significant distributional consequences, then these should be analysed in terms of the Government's wider distributional policies and drawn to decision-makers' attention.
  • This generally needs to be done separately from the CBA, but should be referred to in the CBA summary table.

202.The purpose of CBA is to help decision-makers understand the welfare impacts of their decisions. Up to this point, this guide has measured welfare impacts in terms of the ‘willingness to pay’ concept. However, the application of the ‘willingness to pay’ concept suffers from two welfare-related limitations:

  1. Many public sector projects are of a kind where willingness to pay is not matched by an actual payment (eg, the provision of security services by the police) and where negative impacts (eg, the noise produced by a railway) are not accompanied by compensation.
  2. Welfare economics has long recognised that the marginal utility of income of different persons is not equal, that is to say that the benefit that a poor person derives from another dollar of income, and therefore from another dollar of expenditure, may be higher than the benefit derived by a rich person. Basing a CBA on the concept of ‘willingness to pay’ therefore reflects the existing distribution of income or wealth, which may be considered to be inequitable.

203.It is almost inevitable, therefore, that public sector projects have distributional consequences which some people will consider undesirable.

204.The UK Treasury Green Book recommends the inclusion of distributional weights in cost benefit analyses unless the analyst can justify not doing so. This guide does not recommend that,[13] and instead recommends that where projects or options have significant favourable or unfavourable distributional consequences, that they be analysed separately in terms of their relationship to wider government distributional policies and drawn to decision-makers' attention.

205.There are several reasons why using distributional weights does not seem a good idea. One is that different projects impact on different people differently, so that it is likely that each individual ought to be compensated in some cases, while in others the individual ought to be doing the compensating. Given the very large number of public sector projects that impact on individuals, it is likely that the net level of advantage or disadvantage to each individual is much smaller than the advantage or disadvantage arising out of a single project.

206.Another reason is that the distributional impacts of a given project are usually difficult to determine, not least because the final incidence of the benefit or cost may not fall on the people who are directly affected[14].

207.Also, the tax/welfare system could be thought of as a wash-up compensation system that not only compensates for inequities and misfortunes of life such as disabilities and unemployment, but also compensates for any net disutilities as a result of public sector projects. While it does so imperfectly, it is difficult to determine whether it over-compensates or under-compensates in relation to any individual.

208.Nevertheless, while the tax/welfare system is the primary tool for redressing inequitable income or wealth distributions, there may be situations where a public sector project can contribute to a redistribution of income or wealth at a lower cost. It is therefore desirable to analyse these impacts and refer to them in the CBA summary table. Because of their considerable political importance in some cases, this seems preferable to burying them within the technical cost benefit analysis and running the risk that they are ignored or double counted.

209.Our recommended approach seems even more pertinent where the primary purpose of a project is distributive, for example whether low decile schools should receive a larger financial allocation, or whether special provision should be made for child health outcomes.

Notes

  • [13]Nor does the Australian Department of Finance Handbook of Cost Benefit Analysis 2006.
  • [14]For example, if a new road saves truck drivers time, then the benefit is likely to be passed through to the firms they work for and, if those firms operate in a competitive market, through those firms to the ultimate consumers in the form of lower prices.
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